Chapter 1, Business Combinations

It is not unusual at all for one company to acquire another company. There are many reasons that this occurs. However, two basic types of accounting transactions are used to accomplish the acquisition.

The first type of transaction is by direct acquisition. In this case, one company acquires the net assets of another company by dealing directly with the company in question. For example, if Company A is the acquiring company and Company B is the acquired company, Company A would pay Company B cash, and/or would issue liabilities or stock in exchange for Company B’s net assets.

The second type of transaction is by indirect acquisition. In this case, one company acquires a controlling interest (generally more than 50%) in the voting common stock of another company. The acquiring company, generally referred to as the parent company, deals directly with the stockholders of the acquired company. Generally, the acquired company is referred to as the subsidiary. The resulting accounting issues revolve around consolidation of the financial statements.

Chapter 1 deals with the first type of transaction, i.e., direct acquisition. To learn more about this, click here.